Thursday / May 23.
HomeFT SelectUK faces £24bn bill for shutting North Sea fields

UK faces £24bn bill for shutting North Sea fields

UK taxpayers are facing a £24bn bill for decommissioning oil and gasfields in the North Sea — threatening to wipe out remaining tax revenues from an industry that has been among the Treasury’s most reliable cash cows for the past four decades.

The new estimates show how the North Sea oil industry risks becoming a net drain on UK resources as it enters its sunset years and raises further questions over the fiscal viability of an independent Scotland.

The projections, based on analysis of the latest industry plans for plugging wells and dismantling platforms and pipelines, is 50 per cent higher than the official Treasury forecast for a public liability of £16bn.

Nicola Sturgeon, Scottish first minister, said on Sunday she was “not bluffing” about holding a second independence referendum if Theresa May did not keep Britain in the European single market after leaving the EU. However, the prospect of oil revenues being extinguished by decommissioning costs could make it harder to win the case with voters.

Oil companies are forecast to spend £53bn from 2017 winding down North Sea operations and almost half is expected to be recouped from the Treasury through tax relief, according to Wood Mackenzie, the energy research group that conducted the analysis.

Fiona Legate, analyst at Wood Mackenzie, said the North Sea was set to become “a significant annual expenditure for government, rather than a provider of income” in the decades to come.

Decommissioning is expected to take at least four decades to complete but Wood Mackenzie expects about a fifth of the spending in the next five years, implying a Treasury bill of almost £5bn by the end of 2021.

Royal Dutch Shell, the biggest UK oil and gas group, is preparing to launch a public consultation in the coming weeks on its plans for decommissioning the giant Brent field, which helped launch the North Sea industry in the 1970s and gave its name to the international benchmark price of crude oil.

Decommissioning costs are subsidised under rules allowing oil companies to claw back some of the £330bn of taxes paid since North Sea production began. The tax relief was designed to prevent clean-up liabilities deterring investment.

About £6bn has been spent on decommissioning so far. Last year was the first when tax relief exceeded Treasury revenues from the North Sea as industry profits were hit by weak oil prices. The deficit is forecast to grow to £500m this fiscal year, according to official figures, before returning to modest surplus in the next five years as several new fields come on stream.

However, future revenues will depend on oil prices and whether companies invest in further exploration. More than 43bn barrels of oil and oil equivalent have been extracted since North Sea production started in 1967. There are still 10bn-20bn barrels remaining, according to Oil & Gas UK, the industry group, which said it expected tax proceeds to exceed decommissioning costs “for a long time” to come.

The Treasury said it was “committed to maximising the recovery of the UK’s oil and gas while ensuring a fair return for the nation”. The government was working with industry and regulators to reduce decommissioning costs, it added.

The SNP vowed during its unsuccessful 2014 referendum campaign to maintain decommissioning tax relief after independence but the subsequent crash in oil revenues has made this a more difficult proposition. An independent Scotland would be sure to argue that the UK should keep much of the liability having benefited from North Sea tax revenues for the past four decades.

The Scottish government said its UK counterpart “holds the key fiscal levers” over the North Sea, adding that offshore oil and gas still had “a bright future if the focus of industry and government is on maximising economic recovery, efficiency of extraction and encouraging new investment”.

[We are] committed to maximising the recovery of the UK’s oil and gas while ensuring a fair return for the nation

Ms Sturgeon’s comments on the BBC’s Andrew Marr Show reflected renewed momentum behind the nationalist cause since the UK voted to leave the EU, despite Scottish voters having preferred by a wide margin to remain. However, fiscal concerns remain a big obstacle to winning majority support for independence.

Official data published last August showed the gap between public spending and revenues in Scotland widening to 9.5 per cent of gross domestic product, more than twice the deficit for the UK as a whole.

As recently as 2011-12, Scotland’s geographic share of UK North Sea oil revenues was worth £9.6bn, more than total Scottish public spending on education, training and environmental protection. Last year oil revenues were a paltry £60m.

Via FT